Most-favored-nation clauses, explained.

A most-favored-nation clause sounds simple until someone has to administer it. It propagates rights in the manner the agreement specifies. Under ILPA's model, eligible investors receive more favorable rights directly, subject to defined exclusions. Other agreements require notice and an election, restrict eligibility by commitment size, or do both.

When the agreement requires notice and election

Where an MFN provision uses notice and election, the fund must deliver the covered side letters, or a summary of them, to the investors holding election rights. The governing documents determine when notice is due, who is eligible, how elections must be made, and when they become effective. Morgan Lewis recommends, where possible, consolidating the process after the final closing, and requiring investors to set out elections in writing within a designated period, typically 30 days.

Eligibility may be tiered

Under a tiered MFN, not every holder qualifies for every term. Where an agreement tiers eligibility by commitment size, a smaller investor may be unable to elect a term granted to an LP above its tier. Carve-outs shrink the list further: Morgan Lewis lists advisory committee appointment or observer rights, transfer rights, disclosure rights, rights of affiliates or strategic investors, and provisions addressing legal, regulatory or policy issues among the typical exclusions. The fund therefore has to determine which investors are owed notice and which terms each may elect.

What the notice must reveal

An MFN notice can create a second question: how much of the underlying term it has to reveal. A categorical description — a management fee discount, without the number — protects the original investor's negotiated economics but may leave an eligible LP unable to evaluate the election. The answer depends on the clause's disclosure language, which may specify anything from a summary to delivery of the side letters themselves.

It breaks on time, not on rules

Side letters are negotiated one investor at a time, often across separate closing workstreams. A provision may be correct within its own letter without producing a correct fund-wide MFN process. That requires the fund to compare every covered term before the contractual deadline. Storage location isn't the problem. The notice depends on relationships between the documents, not where any one of them sits.

The process has to be queryable

A workable process does not treat the MFN obligation as something to reconstruct after the fact. It treats it as a set of structured terms — this LP, this provision, this commitment tier, this carve-out — queryable the moment a new term is negotiated, so the notice can be assembled correctly and on time instead of built from scratch against a deadline. That's not about predicting every future negotiation — it's about knowing, the moment a new term is offered, exactly who else already has a right to hear about it.

A notice-and-election MFN is not self-executing. It only works if the fund can administer the process behind it. The clause may be one sentence. The process behind it is not.